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**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934.** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended March 31, 2010.**

 

**OR**

 

| **o** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For the transition period from                              to                              **

 

**Commission File Number: 1-11388**

 

**PLCSYSTEMS INC.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Yukon Territory, Canada**                                      | ** ** | **04-3153858**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |       | (I.R.S. Employer  Identification No.) |
|                                                             |       |                                  |
| **10 Forge Park, Franklin, Massachusetts**                       | ** ** | **02038**                             |
| (Address of  Principal Executive Offices)                        |       | (Zip Code)                            |

 

Registrant’s telephone number, including area code: **(508) 541-8800**

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  **Yes  ****x****    No  ****o**

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). **Yes ****o****  No ****o**

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company x |
| (Do not check if a smaller  reporting company) |   |                        |

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act)  **Yes  ****o****   No****x**

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

| **Class**                  | ** ** | **Outstanding  at May 7, 2010** |
|----------------------------|------------|--------------------------------------|
| Common Stock, no par value |       | 30,351,092                           |

 

 

 

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**PLCSYSTEMS INC.**

 

**Index**

 
| Part I.  | Financial Information: |                                                                                        |
|---------------|------------------------|---------------------------------------------------------------------------------------------|
|          |                   |
|          | Item 1.                | Financial Statements                                                                        |   |
|          |                   |                                                                                        |   |
|          |                   | Condensed  Consolidated Balance Sheets (unaudited)                                          | 3 |
|          |                   |                                                                                        |   |
|          |                   | Condensed  Consolidated Statements of Operations (unaudited)                                | 4 |
|          |                   |                                                                                        |   |
|          |                   | Condensed  Consolidated Statements of Cash Flows (unaudited)                                | 5 |
|          |                   |                                                                                        |   |
|          |                   | Notes to Condensed Consolidated Financial Statements  (unaudited)                           | 6 |
|          |                   |                                                                                        |   |
|          | Item 2.                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
|          |                   |                                                                                        |   |
|          | Item 3.                | Quantitative  and Qualitative Disclosures about Market Risk                                 | 20 |
|          |                   |                                                                                        |   |
|          | Item 4T.               | Controls and  Procedures                                                                    | 20 |
|          |                   |
| Part II. | Other Information:     |                                                                                        |
|          |                   |                                                                                        |   |
|          | Item 1A.               | Risk Factors                                                                                | 21 |
|          |                   |                                                                                        |   |
|          | Item 6.                | Exhibits                                                                                    | 21 |

 

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**Part I.         Financial Information**

 

**Item 1.        FinancialStatements**

 

**PLCSYSTEMS INC.**

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

 
| ** **                                                                                                                                           | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                           | ** ** |
| Current assets:                                                                                                                                      |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                                            |       | $                        | 1,843      |                        | $          | 2,686 |   |
| Accounts receivable, net of allowance of $24 at  March 31, 2010 and December 31, 2009                                                      |       | 748                      |       | 720                         |       |
| Inventories                                                                                                                                          |       | 801                      |       | 876                         |       |
| Prepaid expenses and other current assets                                                                                                            |       | 524                      |       | 505                         |       |
| Assets held for sale                                                                                                                                 |       | 71                       |       | —                      |       |
| Total current assets                                                                                                                                 |       | 3,987                    |       | 4,787                       |       |
| Equipment, furniture and leasehold improvements, net                                                                                                 |       | 57                       |       | 69                          |       |
| Other assets                                                                                                                                         |       | 186                      |       | 186                         |       |
| Total assets                                                                                                                                         |       | $                        | 4,230      |                        | $          | 5,042 |   |
| ** **                                                                                                                                           |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                        |       |
| Current liabilities:                                                                                                                                 |       |                     |       |                        |       |
| Accounts payable                                                                                                                                     |       | $                        | 264        |                        | $          | 336 |   |
| Accrued compensation                                                                                                                                 |       | 262                      |       | 224                         |       |
| Accrued other                                                                                                                                        |       | 210                      |       | 279                         |       |
| Deferred revenue                                                                                                                                     |       | 1,853                    |       | 2,084                       |       |
| Total current liabilities                                                                                                                            |       | 2,589                    |       | 2,923                       |       |
| Deferred revenue                                                                                                                                     |       | 406                      |       | 390                         |       |
| Stockholders’ equity:                                                                                                                           |       |                     |       |                        |       |
| Preferred stock, no par value, unlimited shares  authorized, none issued and outstanding                                                             |       | —                   |       | —                      |       |
| Common stock, no par value, unlimited shares authorized,  30,351 shares issued and outstanding as of March 31, 2010 and  December 31, 2009 |       | 93,893                   |       | 93,893                      |       |
| Additional paid in capital                                                                                                                           |       | 707                      |       | 627                         |       |
| Accumulated deficit                                                                                                                                  |       | (93,025                  | )          | (92,464                     | )          |
| Accumulated other comprehensive loss                                                                                                                 |       | (340                     | )          | (327                        | )          |
| Total stockholders’ equity                                                                                                                      |       | 1,235                    |       | 1,729                       |       |
| Total liabilities and stockholders’ equity                                                                                                      |       | $                        | 4,230      |                        | $          | 5,042 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

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**PLCSYSTEMS INC.**

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands,except per share data)

(Unaudited)

 
| ** **                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------|------------|----------------------------------------|------------|
| ** **                            | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Revenues:                             |       |                                   |       |   |   |
| Product sales                         |       | $                                      | 764        |   | $ | 1,259 |   |
| Service fees                          |       | 298                                    |       | 308 |   |
| Total revenues                        |       | 1,062                                  |       | 1,567 |   |
| Cost of revenues:                     |       |                                   |       |   |   |
| Product sales                         |       | 408                                    |       | 411 |   |
| Service fees                          |       | 161                                    |       | 201 |   |
| Total cost of revenues                |       | 569                                    |       | 612 |   |
| Gross profit                          |       | 493                                    |       | 955 |   |
| Operating expenses:                   |       |                                   |       |   |   |
| Selling, general and  administrative  |       | 801                                    |       | 1,085 |   |
| Research and development              |       | 253                                    |       | 229 |   |
| Total operating expenses              |       | 1,054                                  |       | 1,314 |   |
| Loss from operations                  |       | (561                                   | )          | (359 | ) |
| Other income, net                     |       | —                                 |       | 1 |   |
| Net loss                              |       | $                                      | (561       | ) | $ | (358 | ) |
| Basic and diluted loss per  share     |       | $                                      | (0.02      | ) | $ | (0.01 | ) |
| Weighted average shares  outstanding: |       |                                   |       |   |   |
| Basic and diluted                     |       | 30,351                                 |       | 30,351 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

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**PLC SYSTEMS INC.**

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 
| ** **                                                                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                    | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Operating activities:                                                         |       |                                   |       |   |   |
| Net loss                                                                      |       | $                                      | (561       | ) | $ | (358 | ) |
|                                                                          |       |                                   |       |   |   |
| Adjustments to reconcile net loss to net cash used  for operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                 |       | 13                                     |       | 27 |   |
| Compensation expense from stock options                                       |       | 79                                     |       | 54 |   |
| Change in assets and liabilities:                                             |       |                                   |       |   |   |
| Accounts receivable                                                           |       | (15                                    | )          | 270 |   |
| Inventory                                                                     |       | 4                                      |       | 107 |   |
| Prepaid expenses and other assets                                             |       | (19                                    | )          | 67 |   |
| Accounts payable                                                              |       | (72                                    | )          | (119 | ) |
| Deferred revenue                                                              |       | (214                                   | )          | (716 | ) |
| Accrued liabilities                                                           |       | (30                                    | )          | (24 | ) |
| Net cash used for operating activities                                        |       | (815                                   | )          | (692 | ) |
|                                                                          |       |                                   |       |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                 |       | (28                                    | )          | (15 | ) |
| Net decrease in cash and cash equivalents                                     |       | (843                                   | )          | (707 | ) |
| Cash and cash equivalents at beginning of period                              |       | 2,686                                  |       | 5,026 |   |
| Cash and cash equivalents at end of period                                    |       | $                                      | 1,843      |   | $ | 4,319 |   |

 

The accompanyingnotes are an integral part of the condensed consolidated financial statements.

 

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**PLCSYSTEMS INC.**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31,2010

 

***1.******                                     ******Business and Liquidity***

 

PLC Systems Inc. (“PLC” or the “Company”)is a medical device company specializing in innovative technologies for thecardiac and vascular markets.  TheCompany pioneered and manufactures the *CO**2** Heart Laser System* (the “Heart Laser System”) that cardiacsurgeons use to perform carbon dioxide (CO2) transmyocardial revascularization, orTMR, to alleviate symptoms of severe angina. Over the past two years, the Company has begun initial commercializationoutside the United States of its newest product, RenalGuard®,which currently represents the Company’s key strategic growth initiative andprimary business focus.  The Companyconducts business operations as one operating segment.

 

RenalGuard is designed to reduce thepotentially toxic effects that contrast media can have on the kidneys when itis administered to patients during certain medical imaging procedures. It isbelieved that allowing contrast media to dwell in the kidneys of certain highrisk patients can lead to contrast-induced nephropathy (“CIN”), a potentiallydeadly form of acute kidney injury. By inducing and maintaining a high urineflow rate before, during and after these medical imaging procedures, theCompany believes the incidence rates of CIN in at-risk patients can be reduced.RenalGuard facilitates this increased urine clearance automatically, enablingthe body to more rapidly void the contrast media, thereby reducing its overallresident time and toxic effects in the kidney.

 

The RenalGuard System consists of aproprietary, closed loop, software-controlled console and accompanying single-usesets.  RenalGuard operates by firstcollecting and measuring patient urine outputs and then in real-time preciselymatching these urine outputs with a prescribed replacement fluid by means ofintravenous infusion. With its automated matched fluid replacement capability,RenalGuard is intended to promote and maintain high urine outputs and minimizethe risk to patients of over- or under-hydration during image guidedcatheterization procedures where contrast media are routinely administered.

 

The U.S. Food and Drug Administration (“FDA”)has granted the Company approval to begin a clinical trial to study the safetyand effectiveness of RenalGuard in the prevention of CIN; however, the Companyhas deferred commencement of this study until it can successfully raiseadditional capital necessary to start and complete the study.  The Company must successfully complete thisstudy and obtain FDA pre-market approval in order to market RenalGuard in theU.S.

 

The Company obtained a CE Mark forRenalGuard in December 2007 and began its initial commercializationefforts in the European Union in Italy in April 2008.

 

The Company has sustained recurring netlosses and negative cash flows from operations for several years. During thethree months ended March 31, 2010, the Company incurred a net loss of$561,000 and used cash in operations of $815,000. As of March 31, 2010,cash and cash equivalents were $1,843,000. Management expects that quarterlylosses and negative cash flows will continue during 2010. These factors raisesubstantial doubt about the Company’s ability to continue as a going concern.The accompanying consolidated financial statements have been

 

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prepared assuming that the Company will continueas a going concern, which contemplates the realization of assets and thesatisfaction of liabilities in the normal course of business. The financialstatements do not include any adjustments relating to the recoverability andclassification of recorded asset amounts or the amounts and classification ofliabilities that might be necessary should the Company be unable to continue asa going concern.

 

Based upon the currentfinancial condition of the Company and the expectation of continued quarterlylosses during 2010, management is currently investigating ways to raiseadditional capital that can be completed in the next few months. In the eventthe Company is unable to raise such capital in the near term, the Company isunlikely to be able to continue its operations. During the first quarter, the Company announced that it had engaged afinancial advisor to assist the Company in this effort. In addition, theCompany announced a one-third reduction in its workforce during the firstquarter of 2010, which it estimates will save the Company approximately$750,000 annually starting in the third quarter of 2010. As a result of thisreduction, in the three months ended March 31, 2010, the Company recordeda charge of $204,000, comprised of $167,000 of severance pay and $37,000 ofstock option compensation expense.  Thischarge is included in the accompanying Consolidated Statement of Operations asa component of Cost of revenues, Selling, general and administrative, andResearch and development in the amounts of $66,000, $48,000 and $90,000,respectively. During the three months ended March 31, 2010, the Companypaid $65,000 of severance pay. As of March 31, 2010, remaining severance payof $102,000 is reflected as part of accrued compensation in the accompanyingConsolidated Balance Sheet. This amount is expected to be paid out in full toterminated employees during the second quarter of 2010.

 

The Company will continueto review its other expense areas to determine whether additional reductions indiscretionary spending can be achieved. The Company also believes that therecent announcements of interim positive clinical data from two independentinvestigator-sponsored clinical trials in Italy, which show RenalGuard to beboth a safe and effective product for the prevention of CIN in at-riskpatients, present a substantial opportunity for it to increase its sales andachieve profitable results in the next few years, provided the Company is ableto raise the additional capital it needs in the near term to sustain itsoperations and expand its RenalGuard sales and marketing programs. There can beno assurance, however, that the Company’s plans will be successful or that theCompany will be successful in obtaining the capital necessary to continue itsongoing operations.

 

On March 20, 2007, the Companyentered into a distribution agreement with Novadaq Corp. (“Novadaq”), asubsidiary of Novadaq Technologies Inc., pursuant to which the Companyappointed Novadaq as its exclusive distributor in the United States for its TMRbusiness.  The agreement amended andrestated the exclusive distribution agreement between the Company and EdwardsLifesciences LLC (“Edwards”), which had been assigned by Edwards to Novadaq onthe same date.  The agreement withNovadaq, which is effective through February 11, 2019, reflectssubstantially the same roles, responsibilities and financial terms as theprevious agreement with Edwards.

 

***2.******                                     ******Basis of Presentation***

 

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with generally accepted accounting principles (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Regulation 

 

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S-X.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringadjustments) considered necessary for a fair presentation have been included.Operating results for the three months ended March 31, 2010 are notnecessarily indicative of the results that may be expected for the year ending December 31,2010.  These financial statements shouldbe read in conjunction with the consolidated financial statements and footnotesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2009.

 

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued *FASB Accounting StandardsCodification*TM (the “ASC”). The ASC is effective for interimand annual periods ending after September 15, 2009. Upon the effective date,the ASC became the single source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in thepreparation of financial statements in conformity with GAAP. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. The ASC does not replace or affect guidance issued by the SECor its staff for public companies in their filings with the SEC. Effective July1, 2009, changes to the ASC are communicated through an Accounting StandardsUpdate. The Company adopted the ASC during the third quarter of 2009 and, as aresult, all references to prior accounting and reporting standards which havebeen superseded by the ASC have been changed to reflect the new referencewithin the ASC. The ASC does not change or alter existing GAAP and, therefore,it did not impact the Company’s financial position, results of operations orcash flows.

 

Thepreparation of financial statements in accordance with generally acceptedaccounting principles requires the Company to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements, andthe reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

***3.******                                     ******Inventories***

 

Inventories are stated at the lower of cost (computed on a first-in,first-out method) or market value and include allocations of labor andoverhead.  As of March 31, 2010 and December 31,2009, inventories consisted of the following (in thousands):

 
| ** **        | ** ** | **March 31,********2010** | ** ** | **December 31,********2009** | ** ** |
|-------------------|------------|--------------------------------|------------|-----------------------------------|------------|
| Raw  materials    |       | $                              | 307        |                              | $          | 404 |   |
| Work  in progress |       | 51                             |       | 14                                |       |
| Finished  goods   |       | 443                            |       | 458                               |       |
|              |       | $                              | 801        |                              | $          | 876 |   |

 

***4.******                                     ******Stock-BasedCompensation***

 

In May 2005, the Company’sshareholders approved the 2005 Stock Incentive Plan (the “2005 Plan”).  Incentive stock options are issuable only toemployees of the Company, while 

 

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non-qualified stock options may be issued tonon-employee directors, consultants and others, as well as to employees.  Under the 2005 Plan, the per share exerciseprice of incentive stock options may not be less than the fair market value ofthe common stock on the date the option is granted.  The 2005 Plan provides that the Company maynot grant non-qualified stock options at an exercise price less than 85% of thefair market value of the Company’s common stock.

 

The Company grants stock options to itsnon-employee directors.  New non-employeedirectors receive an initial grant of an option to purchase 45,000 shares ofthe Company’s common stock that generally vests in quarterly installments overthree years.  Once the initial grant hasfully vested, non-employee directors (other than the Chairman of the Board)receive an annual grant of an option to purchase 15,000 shares of the Company’scommon stock that generally vests in four equal quarterly installments. TheChairman of the Board receives an annual grant of an option to purchase 30,000shares of the Company’s common stock that generally vests in four equalquarterly installments. All such options have an exercise price equal to thefair market value of the Company’s common stock on the date of grant.

 

As a result of theworkforce reduction discussed in Note 1, options held by terminated employeesto purchase a total of 498,000 shares of common stock with an exercise price of$0.24 per share expired, but were, as part of the Company’s overallseverance arrangement with the terminated employees, replaced by the Companywith new options to purchase 498,000 shares of common stock at an exerciseprice of $0.24 per share.  These newoptions were fully vested upon grant and expire one year from the date ofgrant. The Company recorded an additional $37,000 in stock compensation expenserelated to these grants. There were no options granted during the three monthsended March 31, 2009.

 

As of March 31, 2010, there were1,020,000 shares of common stock available to be granted under the 2005 Plan.

 

The following is a summary of option activity underall of the Company’s stock incentive plans (in thousands, except per optiondata):

 
| ** **                           | ** ** | **Number  of  Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Average  Remaining  Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------|------------|-------------------------|------------|----------------------------------------|------------|---------------------------------------------------|------------|---------------------------------|------------|
| Outstanding,  December 31, 2009 |       | 5,310                   |       | $                                      | 0.25       |                                              | 4.46       |                            | —     |   |
| Granted                              |       | 497                     |       | 0.24                                   |       |                                              |       |                            |       |
| Exercised                            |       | —                  |       | —                                 |       |                                              |       |                            |       |
| Forfeited                            |       | (538                    | )          | 0.24                                   |       |                                              |       |                            |       |
| Expired                              |       | —                  |       | —                                 |       |                                              |       |                            |       |
| Outstanding,  March 31, 2010    |       | 5,269                   |       | 0.25                                   |       | 4.24                                              |       | —                          |       |
| Exercisable,  March 31, 2010    |       | 1,148                   |       | 0.28                                   |       | 2.69                                              |       | —                          |       |
|                                      |            |                         |            |                                        |            |                                                   |            |                                 |            |  |

 

The aggregate fair value of options vested duringthe three months ended March 31, 2010 and 2009 was $75,000 and $8,000,respectively.

 

The Company estimates thefair value of stock options on the day of grant using the

 

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Black-Scholes optionpricing model, which incorporates various assumptions including volatility,expected life and interest rates.  The Company recorded compensation expense of$79,000 in the three months ended March 31, 2010, as compared to $54,000in the three months ended March 31, 2009. As of March 31, 2010, the Company had $154,000 of totalunrecognized compensation cost related to its unvested options, which isexpected to be recognized over a weighted average period of 1.6 years.

 

Theweighted average fair value of options issued during the three months ended March 31,2010 was estimated using the Black-Scholes model.

 
| ** **              | ** ** | **Three Months Ended  March 31, 2010** | ** ** |
|-------------------------|------------|---------------------------------------------|------------|
| Expected life (years)   |       | 1.00                                        |       |
| Interest rate           |       | 0.47                                        | %          |
| Volatility              |       | 132.4                                       | %          |
| Expected dividend yield |       | None                                        |       |
| Value of option granted |       | $                                           | 0.08       |   |
|                         |            |                                             |            |  |

 

The expected life wascalculated in 2010 using the simplified method. The risk-free interest rate isbased on the U.S. Treasury yield curve in effect at the time of the grant forthe expected term period.  Expectedvolatility is based exclusively on historical volatility data of the Company’scommon stock.  The Company estimates anexpected forfeiture rate based on its historical forfeiture activity.  Actual results, and future changes inestimates, may differ substantially from the Company’s current estimates.

 

*Stock Purchase Plan*

 

TheCompany has a 2000 Employee Stock Purchase Plan (the “Purchase Plan”) for alleligible employees whereby shares of the Company’s common stock may bepurchased at six-month intervals at 95% of the closing stock price on the lastbusiness day of the relevant plan period. The Company’s stock trades in the over-the-counter market and, as such,the last sale price of the Company’s stock is deemed to be the closing stockprice for purposes of determining the purchase price for the current six-monthperiod.  Employees may purchase shareshaving a value not exceeding 10% of their gross compensation during an offeringperiod, subject to certain additional limitations.  There was no purchase activity in the threemonths ended March 31, 2010 or 2009. At March 31, 2010, 294,461 shares were reserved for future issuanceunder the Purchase Plan.

 

***5.******                                     ******Revenue Recognition***

 

TheCompany records revenue from the sale of TMR kits at the time of shipment toNovadaq.  TMR kit revenues include theamount invoiced to Novadaq for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related to apayment of $4,533,333 from Edwards, the Company’s previous exclusive U.S. TMRdistributor, received in February 2004. This payment was made in exchange for a reduction in the prospectivepurchase price the Company receives upon a sale of the kits.  The Company is amortizing this payment intoits Consolidated Statements of Operations as revenue over a seven year period(culminating in 2010).  The Companydetermined that a seven year timeframe was 

 

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themost appropriate amortization period based on a valuation model it used toassess the economic fairness of the payment. Factors the Company considered indeveloping this valuation model included the estimated foregone revenues over aseven year period resulting from the reduction in the prospective purchaseprice payable to the Company, a discount rate deemed appropriate to thistransaction and an estimate of the remaining economic useful life of thecurrent TMR kit design, without any benefit being given to potential futureproduct improvements the Company may make. The Company reviews annually, and adjusts if necessary, the prospectiverevenue amortization rate for kits based on its best estimate of the totalnumber of kits likely remaining to be shipped to hospital customers by Novadaqthrough 2010. The Company recorded amortization of deferred revenue of $289,000in the three months ended March 31, 2010, as compared to $269,000 in thethree months ended March 31, 2009, which is included in revenues in theConsolidated Statements of Operations.

 

TMRlasers are billed to Novadaq in accordance with purchase orders that theCompany receives.  Invoiced TMR lasersare recorded as other current assets and deferred revenue on the Company’sConsolidated Balance Sheet until such time as the laser is shipped to ahospital, at which time the Company records revenue and cost of revenue.

 

Underthe terms of the Novadaq TMR distribution agreement, once Novadaq has recovereda prescribed amount of revenue from a hospital for the use or purchase of a TMRlaser, any additional revenues earned by Novadaq are shared with the Companypursuant to a formula established in the distribution agreement. The Companyonly records its share of such additional revenue, if any, at the time therevenue is earned.

 

The Company records all otherproduct revenue, including sales of TMR lasers and kits to internationalcustomers, sales of RenalGuard consoles and single-use sets and OEM sales ofsurgical tubes and general purpose CO2 lasers, at the time of shipment.

 

Revenuesfrom service and maintenance contracts are recognized ratably over the life ofthe contract.

 

Installationrevenues related to a TMR laser transaction are recorded as a component ofservice fees when the laser is installed.

 

***6.******                                     ******Loss per Share***

 

Inthe three months ended March 31, 2010 and 2009, basic and diluted loss pershare have been computed using only the weighted average number of commonshares outstanding during the period without giving effect to any potentialfuture issuances of common stock related to stock option programs, since theirinclusion would be antidilutive.

 

Forthe three months ended March 31, 2010 and 2009, 5,269,000 and 5,376,000shares, respectively, attributable to outstanding stock options were excludedfrom the calculation of diluted earnings per share because the effect wouldhave been antidilutive.

 

***7.******                                     ******Comprehensive Loss***

 

Total comprehensive lossfor the three months ended March 31, 2010 and 2009 amounted to $574,000and $368,000, respectively. Comprehensive loss is comprised of net loss plus the

 

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increase/decrease incurrency translation adjustment.

 

***8.             Warranty andPreventative Maintenance Costs***

 

TheCompany warranties its products against manufacturing defects under normal useand service during the warranty period. The Company obtains similar warranties from a majority of its suppliers,including those who supply critical Heart Laser System components.  In addition, under the terms of its TMRdistribution agreement with Novadaq, the Company is able to bill Novadaq foractual warranty costs, including preventative maintenance services, up to aspecified amount during the warranty period.

 

The Company evaluates theestimated future unrecoverable costs of warranty and preventative maintenanceservices for its installed base of lasers and RenalGuard consoles andsingle-use sets on a quarterly basis and adjusts its warranty reserveaccordingly.  The Company considers allavailable evidence, including historical experience and information obtainedfrom supplier audits.

 

Changes in the warrantyaccrual were as follows (in thousands):

 
| ** **                    | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Balance, beginning of  period |       | $                                      | 7          |   | $ | 10 |   |
| Provision for warranties      |       | 35                                     |       | 20 |   |
| Balance, end of period        |       | $                                      | 42         |   | $ | 30 |   |

 

***9.******                                     ******Subsequent Event***

 

In May 2010, theCompany sold to a newly formed corporation affiliated with its principal OEMcustomer certain of its OEM surgical tube assets, comprised principally ofinventory, equipment, intellectual property and certain other intangibleassets, as well as all necessary manufacturing documentation needed to performcontract assembly services for general purpose CO2 lasers. The total sale pricefor these assets was $225,000, of which approximately $154,000 was paid at thetime of closing, with the balance to be paid over a period not to exceed sixmonths. Following the sale, Dr. Robert I. Rudko, who is a part-time officer, adirector and a stockholder of the Company, acquired a minority interest in thecorporation that purchased the OEM assets.

 

As of March 31,2010, the carrying value of assets held for sale was $71,000. Upon beingclassified as held for sale, the recoverability of the carrying value wasassessed, and the assets held for sale are reported at the lower of thecarrying value or fair value less cost to sell. The assets are aggregated and reported on a separate line in theaccompanying Consolidated Balance Sheet.

 

**Item 2.****                      ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

**Overview**

 

We are a medical device companyspecializing in innovative technologies for the cardiac and vascularmarkets.  We pioneered and manufacturethe Heart Laser System that cardiac surgeons use to perform TMR to alleviatesymptoms of severe angina. Over the past two years, 

 

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we have begun initial commercialization outsidethe United States of our newest product, RenalGuard®, which currently represents our keystrategic growth initiative and primary business focus.

 

RenalGuard is designed to reduce thepotentially toxic effects that contrast media can have on the kidneys when itis administered to patients during certain medical imaging procedures. It isbelieved that allowing contrast media to dwell in the kidneys of certain higherrisk patients can lead to CIN, a potentially deadly form of acute kidneyinjury. By inducing and maintaining a high urine flow rate before, during andafter these medical imaging procedures, we believe the incidence rates of CINin at-risk patients can be reduced. RenalGuard facilitates this increased urineclearance automatically, enabling the body to more rapidly void the contrastmedia, thereby reducing its overall resident time and toxic effects in thekidney.

 

The RenalGuard System consists of aproprietary, closed loop, software-controlled console and accompanyingsingle-use sets. RenalGuard operates by first collecting and measuring patienturine outputs and then in real-time precisely matching these urine outputs witha prescribed replacement fluid by means of intravenous infusion. With itsautomated matched fluid replacement capability, RenalGuard is intended to promoteand maintain high urine outputs and minimize the risk to patients of over- orunder-hydration during image guided catheterization procedures where contrastmedia are routinely administered.

 

In the U.S., we have received FDAapproval to conduct a pivotal human clinical trial of RenalGuard evaluating itssafety and effectiveness in preventing CIN. This trial is required to support a pre-market approval application,which must be approved by the FDA before we can market RenalGuard in the U.S.We do not intend to commence this pivotal study until we are able to securesufficient additional capital to complete the study.

 

We obtained a CE Mark for RenalGuard in December 2007and began our initial commercialization efforts in the EU in Italy in April 2008.

 

Novadaq, our U.S. distributor for theHeart Laser System, is our largest customer, accounting for 68% of our totalrevenues in the three months ended March 31, 2010 and 65% of our totalrevenues in the year ended December 31, 2009.  Our distributor of RenalGuard in Italy,Artech, accounted for 10% of our total revenues and 81% of our RenalGuardrevenues in the year ended December 31, 2009. We expect these salesconcentrations with Novadaq for TMR sales and Artech for RenalGuard sales tocontinue in 2010.

 

Approximately75% of our revenues in the three months ended March 31, 2010 and 76% ofour revenues in the year ended December 31, 2009 came from the sale andservice of TMR lasers and related disposable kits. We did not sell any HL2lasers to Novadaq in either the three months ended March 31, 2010 or theyear ended December 31, 2009 and they have placed no demand on us tomanufacture additional HL2 lasers for them for the remainder of 2010. Webelieve that the number of opportunities for new TMR laser sales to U.S.hospital customers, and specifically sales opportunities for our HL2 laser,will continue to be limited in future quarters as a result of (1) adiminishing number of available hospitals that have not already implemented aTMR program that are still likely to do so in the future and (2) continuingfinancial pressures that hospitals face, in particular for the funding of newcapital equipment purchases, in light of the ongoing trend of cutbacks in bothMedicare and private insurance reimbursement rates for a majority of medicalprocedures. As such, we expect that our U.S. TMR revenues in future

 

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quarterswill be entirely dependent upon the sale of TMR kits and service revenues.

 

As aresult, while we do not expect that our TMR-related kit and service revenueswill change significantly in the near term, we do believe it is more likelythey will decline over time. Therefore we will be largely dependent upon ourability to increase our revenues through higher sales of our RenalGuard productinto international markets. During the first quarter of 2010, we announced thatwe have engaged a financial advisor to assist us with our ongoing efforts toraise additional capital and to explore other strategic options for ourRenalGuard program. We will need to raise capital in the next few months,whether through asset sales, equity investment or other strategic transaction,in order to continue our operations.

 

Ourmanagement reviews a number of key performance indicators to assist indetermining how to allocate resources and run our day-to-day operations. Theseindicators include (1) actual prior quarterly sales trends, (2) projectedU.S. TMR laser and kit sales for the next four quarters, as provided by Novadaqin a rolling 12 month sales forecast, (3) projected future sales ofRenalGuard consoles and single-use sets, (4) research and developmentprogress as measured against internal project plan objectives, (5) budgetto actual financial expenditure results, (6) inventory levels (both ourown and our distributors’), and (7) short term and long term projectedcash flows of the business.

 

**Critical Accounting Policies and Estimates**

 

Our financial statements are based upon theapplication of significant accounting policies, many of which require us tomake significant estimates and assumptions (see Note 2 to the ConsolidatedFinancial Statements).  We believe thatthe following are some of the more material judgment areas in the applicationof our accounting policies that currently affect our financial condition andresults of operations.

 

***Inventories***

 

Inventoriesare stated at the lower of cost (computed on a first-in, first-out method) ormarket value and include allocations of labor and overhead.  A specific obsolescence allowance is providedfor slow moving, excess and obsolete inventory based upon our best estimate ofthe net realizable value of inventory on hand, taking into considerationfactors such as (1) actual trailing 12 month sales, (2) expectedfuture product line demand, based in part upon sales forecast input receivedfrom Novadaq and our other customers, and (3) service part stocking levelswhich, in management’s best judgment, are advisable to maintain in order tomeet warranty, service contract and time and material spare part demands.  Historically, we have found our reserves tobe adequate.

 

***AccountsReceivable***

 

Accountsreceivable are stated at the amount we expect to collect from the outstandingbalances.  We continuously monitorcollections from customers, and we maintain a provision for estimated creditlosses based upon historical experience and any specific customer collectionissues that we have identified. Historically, we have not experienced significant losses related to ouraccounts receivable. Collateral is not generally required. If the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make payments, additional allowances might be required.

 

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***Research and Development***

 

Researchand development costs are expensed as incurred.

 

# ***Warranty and Preventative Maintenance Costs***

 

Wewarranty our products against manufacturing defects under normal use andservice during the warranty period.  Weobtain similar warranties from a majority of our suppliers, including those whosupply critical Heart Laser System components. In addition, under the terms of our TMR distribution agreement withNovadaq, we are able to bill Novadaq for actual warranty costs, includingpreventative maintenance services, up to a specified amount during the warrantyperiod.

 

Weevaluate the estimated future unrecoverable costs of warranty and preventativemaintenance services for our installed base of lasers and RenalGuard consolesand single-use sets on a quarterly basis and adjust our warranty reserveaccordingly.  We consider all availableevidence, including historical experience and information obtained fromsupplier audits.

 

## ***Revenue Recognition***

## ** **

Werecord revenue from the sale of TMR kits at the time of shipment toNovadaq.  TMR kit revenues include theamount invoiced to Novadaq for kits shipped pursuant to purchase ordersreceived, as well as an amortized portion of deferred revenue related to apayment of $4,533,333 from Edwards, our previous exclusive U.S. TMRdistributor, received in February 2004. This payment was made in exchange for a reduction in the prospectivepurchase price we receive upon a sale of the kits.  We are amortizing this payment into ourConsolidated Statements of Operations as revenue over a seven year period(culminating in 2010). We determined that a seven year timeframe was the mostappropriate amortization period based upon a valuation model we used to assessthe economic fairness of the payment. Factors we considered in developing thisvaluation model included the estimated foregone revenues over a seven yearperiod resulting from the reduction in the prospective purchase price payableto us, a discount rate deemed appropriate to this transaction and an estimateof the remaining economic useful life of the current TMR kit design, withoutany benefit being given to potential future product improvements we may make.We review annually, and adjust if necessary, the prospective revenueamortization rate for kits based on our best estimate of the total number ofkits likely remaining to be shipped to hospital customers by Novadaq through2010. We recorded amortization of deferred revenue of $289,000 and$269,000 in the three months ended March 31, 2010 and 2009, respectively,which is included in revenues in our Consolidated Statements of Operations.

 

TMRlasers are billed to Novadaq in accordance with purchase orders that wereceive.  Invoiced TMR lasers arerecorded as other current assets and deferred revenue on our ConsolidatedBalance Sheet until such time as the laser is shipped to a hospital, at whichtime we record revenue and cost of revenue.

 

Underthe terms of the TMR distribution agreement, once Novadaq has recovered aprescribed amount of revenue from a hospital for the use or purchase of a TMRlaser, any additional revenues earned by Novadaq are shared with us pursuant toa formula established in the distribution agreement. We only record our shareof such additional revenue, if any, at the 

 

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timethe revenue is earned.

 

We record all otherproduct revenue, including sales of TMR lasers and kits to internationalcustomers, sales of RenalGuard consoles and single-use sets and OEM sales ofsurgical tubes and general purpose CO2 lasers, at the time of shipment.

 

Revenues from service and maintenance contracts are recognized ratablyover the life of the contract.

 

Installation revenues related to a TMR laser transaction are recorded as acomponent of service fees when the laser is installed.

 

## **Results of Operations**

 

Results for the threemonths ended March 31, 2010 and 2009 and the related percent of revenues wereas follows:

 
| ** **                                  | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------|------------|----------------------------------------|------------|
| ** **                                  | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| ** **                                  | ** ** | **$**                                  | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                  | ** ** | **(dollars in thousands)**             | ** ** |
|                                        |       |                                   |       |   |   |   |   |   |   |
| Total  revenues                             |       | 1,062                                  |       | 100 |   | 1,567 |   | 100 |   |
| Total  cost of revenues                     |       | 569                                    |       | 54 |   | 612 |   | 39 |   |
| Gross  profit                               |       | 493                                    |       | 46 |   | 955 |   | 61 |   |
| Selling,  general & administrative |       | 801                                    |       | 75 |   | 1,085 |   | 69 |   |
| Research &  development            |       | 253                                    |       | 24 |   | 229 |   | 15 |   |
| Total  operating expenses                   |       | 1,054                                  |       | 99 |   | 1,314 |   | 84 |   |
| Loss  from operations                       |       | (561                                   | )          | (53 | ) | (359 | ) | (23 | ) |
| Other  income, net                          |       | —                                 |       | — |   | 1 |   | — |   |
| Net  loss                                   |       | (561                                   | )          | (53 | ) | (358 | ) | (23 | ) |

 
| ** **                                           | ** ** | **Three Months Ended  March 31,** | ** ** | **Increase (decrease)** | ** ** |
|------------------------------------------------------|------------|----------------------------------------|------------|-------------------------|------------|
| ** **                                           | ** ** | **2010**                               | ** ** | **2009**                | ** ** | **over 2009** | ** ** |
| ** **                                           | ** ** | **$**                                  | ** ** | **$**                   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**             | ** ** |
|                                                 |       |                                   |       |                    |       |   |   |   |   |
| Product  sales                                       |       | 764                                    |       | 1,259                   |       | (495 | ) | (39 | ) |
| Service  fees                                        |       | 298                                    |       | 308                     |       | (10 | ) | (3 | ) |
| Total  revenues                                      |       | 1,062                                  |       | 1,567                   |       | (505 | ) | (32 | ) |
| Product  cost of sales                               |       | 408                                    |       | 411                     |       | (3 | ) | (1 | ) |
| Service  fees cost of sales                          |       | 161                                    |       | 201                     |       | (40 | ) | (20 | ) |
| Total  cost of revenues                              |       | 569                                    |       | 612                     |       | (43 | ) | (7 | ) |
| Gross  profit                                        |       | 493                                    |       | 955                     |       | (462 | ) | (48 | ) |
| Selling,  general & administrative expenses |       | 801                                    |       | 1,085                   |       | (284 | ) | (26 | ) |
| Research &  development expenses            |       | 253                                    |       | 229                     |       | 24 |   | 10 |   |
| Total  operating expenses                            |       | 1,054                                  |       | 1,314                   |       | (260 | ) | (20 | ) |
| Loss  from operations                                |       | (561                                   | )          | (359                    | )          | (202 | ) | (56 | ) |
| Other  income, net                                   |       | —                                 |       | 1                       |       | (1 | ) | (100 | ) |
| Net  loss                                            |       | (561                                   | )          | (358                    | )          | (203 | ) | (57 | ) |

 

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***ProductSales***

 

Disposable TMR kitrevenues, the largest component of product sales in the three months endedMarch 31, 2010, decreased by $149,000, or 24%, as compared to the three monthsended March 31, 2009.  The decrease wasdue primarily to a decrease in TMR kit revenues as a result of a lower volumeof domestic TMR kits sold.

 

TMR laser revenuesdecreased $226,000, or 92%, in the three months ended March 31, 2010 ascompared to the three months ended March 31, 2009 as a result of one less newTMR laser being shipped in the 2010 period.

 

International RenalGuard salesincreased $105,000 in the three months ended March 31, 2010 due to sales ofRenalGuard consoles and single-use sets shipped to international distributors.We had no RenalGuard sales during the corresponding period in 2009.

 

Other product salesdecreased $225,000, or 58%, in the three months ended March 31, 2010 ascompared to the three months ended March 31, 2009.  International other product sales decreased$302,000 as a result of a one-time sale of certain third party equipmentrequired to be supplied along with an international Heart Laser System that we recordedas revenue in the first quarter of 2009. Domestic other product sales increased$77,000 as a result of an increase in OEM manufacturing contract assemblyproduct revenues resulting from an increase in new general purpose CO2 laserorders and shipments.

 

***Service FeeRevenues***

 

Service fees decreased$10,000, or 3%, in the three months ended March 31, 2010 as compared to thethree months ended March 31, 2009. Domestic service fees decreased $6,000 andinternational service fees decreased $4,000.

 

***Gross Profit***

 

Gross profit was$493,000, or 46% of total revenues, in the three months ended March 31, 2010 ascompared with gross profit of $955,000, or 61% of total revenues, in the threemonths ended March 31, 2009. The decrease in gross profit dollars is due to (1)the absence of any Heart Laser System sales in 2010 as compared to the oneinternational sale of a Heart Laser System and other third party equipment inthe first quarter of 2009 and (2) lower TMR disposable revenues.  These decreases were offset in part by (1) anincrease in international RenalGuard sales and (2) higher OEM manufacturingcontract assembly revenues.

 

***Selling,General and Administrative Expenses***

 

Selling, general andadministrative expenditures decreased 26% in the three months ended March 31,2010 as compared to the three months ended March 31, 2009.  The decrease was due to lower sales expensesin the first quarter of 2010 as compared to the first quarter of 2009 when weincurred $269,000 of sales costs associated with the sale of a Heart LaserSystem and third party equipment we supplied during the first quarter of2009.  This decrease was offset

 

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in part by highercompensation-related severance and termination costs incurred in connectionwith our February 2010 workforce reduction.

 

***Research andDevelopment Expenses***

 

Research and developmentexpenditures increased 10% in the three months ended March 31, 2010 as comparedto the three months ended March 31, 2009. Compensation-related severance and termination costs increased as aresult of our February 2010 workforce reduction. This increase was offset inpart by lower RenalGuard clinical trial costs resulting from the deferral ofthe U.S. pivotal study.

 

***Other Income***

 

Other income consists ofinterest income earned on our invested cash balances and decreased $1,000 inthe three months ended March 31, 2010.

 

***Net Loss***

 

In the three months endedMarch 31, 2010, our net loss increased $203,000, or 57%, compared to the threemonths ended March 31, 2009, due to lower gross profit dollars offset in partby lower operating expenses.

 

***TMR Kit Shipments***

 

We generally viewdisposable TMR kit shipments to end users as an important metric in evaluatingour TMR business, although we believe that specific short-term factors notindicative of long-term trends can sometimes affect shipments of disposable TMRkits in any given quarter.  Domestic TMRkit shipments referenced in the table below relate to sales by Novadaq tohospital end users.  International TMRkit shipments relate to sales by us directly to our international distributorsor hospital end users.

 

DisposableTMR kit shipments to end users were as follows:

 
| ** **                     | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2010**                               | ** ** | **2009** | ** ** | **%  Decrease  Over  2009** | ** ** |
| Domestic (by U.S. Distributor) |       | 207                                    |       | 332 |   | (38 | ) |
| International                  |       | 10                                     |       | 15 |   | (33 | ) |
| Total                          |       | 217                                    |       | 347 |   | (37 | ) |

 

**Liquidity and Capital Resources**

 

Wecompete in the highly regulated and competitive medical device market placewhere products can take significant time to develop, gain regulatory approvaland then introduce to distributors and end users. We have historically fundedour working capital requirements through cash received from public and privateofferings of our common stock and to a lesser extent 

 

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throughour sales of products and services. We have incurred recurring quarterlyoperating losses over the past few years as we have worked to bring ourRenalGuard System through development and begin our initial commercializationefforts outside the United States. We expect such operating losses willcontinue until such time, if ever, that RenalGuard product sales increasesufficiently to generate profitable results.

 

Absentadditional outside financing in the next few months, whether through assetsales, equity investment or other strategic transactions, we believe that ourexisting available cash resources will be insufficient to sustain our ongoingoperations. As a result, a substantial doubt exists about our ability tocontinue as a going concern without such additional financing, and ourindependent registered public accounting firm’s report on our fiscal 2009financial statements, which is included in our annual report on Form 10-K for the yearended December 31, 2009, contains an explanatory paragraph to thiseffect.

 

Althoughwe are continuing to explore all available options to us to raise theadditional capital we need to continue our operations and implement ourbusiness plan, there can be no assurance that such capital will be available onterms and conditions acceptable to us. Should additional financing not be available on terms and conditionsacceptable to us, we will need to take actions that will adversely impact ourability to continue to realize assets and satisfy liabilities in the normalcourse of business. The consolidated financial statements set forth in thisquarterly report on Form 10-Q do not include any adjustments to reflectthe possible future effects of these uncertainties.

 

Webelieve that the recently announced positive clinical data from the MYTHOS andREMEDIAL II clinical trials, which show RenalGuard to be both a safe andeffective product for the prevention of CIN in at-risk patients, presents asubstantial opportunity for us to increase our sales and achieve profitableresults in the next few years, provided we are able to raise the capital weneed in the near term to sustain our operations until such time as we can reachthis level of commercial success.

 

Cashand cash equivalents totaled $1,843,000 as of March 31, 2010, a decreaseof $843,000 from $2,686,000 as of December 31, 2009.  We have no debt obligations.

 

Cashused for operating activities in the three months ended March 31, 2010 was$815,000 due to our net loss, partially offset by non-cash depreciation andamortization expense and non-cash compensation expense related to stockoptions.  The effect of exchange ratechanges was a $28,000 decrease in cash.

 

**Forward-LookingStatements**

 

This quarterly report on Form 10-Q contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). Statements containing terms such as “believes”, “plans”,“expects”, “anticipates”, “intends”, “estimates” and similar expressionsreflect uncertainty and are forward-looking statements. Forward-lookingstatements are based upon current plans and expectations and involve known andunknown important risks and uncertainties that could cause actual results todiffer materially from those described in the forward-looking statements. Suchimportant factors and uncertainties include, but are not limited to:

 

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·                  We will need to, andwe may be unable to, raise capital to continue our operations, and any suchfinancing will likely be highly dilutive to existing shareholders given ourcurrent market capitalization;

·                  Our independent registered public accounting firm’s report on our 2009financial statements included in our annual report on Form 10-K for theyear ended December 31, 2009 contains a going concern opinion, the effectof which is uncertain, but which could be detrimental to our efforts to raisethe additional capital we need on terms that are acceptable to us;

·                  We expect to incursignificant net losses in future quarters;

·                  We have aconcentration of revenues and credit risk with a single customer, Novadaq, ourexclusive U.S. distributor for our TMR products;

·                  We believe it islikely that our TMR revenues will decline over time, making our futureprospects highly dependent upon the successful commercialization of RenalGuard;

·                  If we are unable to raisesubstantial additional capital, we will not be able to commence our U.S.pivotal clinical trial to study RenalGuard, which is necessary to obtain FDApre-market approval to market RenalGuard in the U.S. We therefore may never besuccessful in our goal of demonstrating the value of RenalGuard in the U.S.which would have an impact on the overall valuation of the Company;

·                  Our ability toeffectively market RenalGuard outside the U.S. is largely dependent on theresults of the MYTHOS and REMEDIAL II investigator-sponsored clinical trials,which we do not control.  We have noassurance that the results from these two trials will be viewed as clinicallymeaningful or that they will lead to increased sales of RenalGuard;

·                  We may never besuccessful in establishing a broad distribution channel for RenalGuard outsidethe U.S., and any distribution channel we may establish may never generatesufficient sales for us to attain profitability;

·                  Our RenalGuard Systemhas only had limited testing in a clinical setting and we may need to modify itsubstantially in the future for it to be commercially acceptable in the broadermarket; and

·                  Any potential futuremodifications required to make RenalGuard commercially acceptable for thebroader market may result in substantial additional costs and/or marketintroduction delays.

 

**Off-BalanceSheet Arrangements**

 

None.

 

**Item 3.****                      ****Quantitative andQualitative Disclosures about Market Risk**

 

Pursuantto Item 305(e) of Regulation S-K, we are not required to provide thisinformation because we are a smaller reporting company.

 

## **Item 4T.**               Controlsand Procedures

## ** **

***Evaluation of Disclosure Controls and Procedures***

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as of March 31, 2010. The term “disclosure controls and procedures”, as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosedby a company in the reports that it

 

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files or submits underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company’s management, including its principal executive and principalfinancial officers, as appropriate to allow timely decisions regarding requireddisclosure.  Management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving their objectives and managementnecessarily applies its judgment in evaluating the cost-benefit relationship ofpossible controls and procedures.  Basedupon the evaluation of our disclosure controls and procedures as of March 31,2010, our chief executive officer and chief financial officer concluded that,as of such date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

***Changesin Internal Control over Financial Reporting***

 

No change in our internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) occurred during the fiscal quarter ended March 31, 2010 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Part II.  Other Information**

 

**Item 1A.****                   ****Risk Factors**

 

Pursuantto the instructions to Item 1A. of Form 10-Q, we are not required toprovide this information because we are a smaller reporting company.

 

**Item 6.****                                  ****Exhibits**

 
| **Exhibit********Number** | ** ** | **Description of Document**                                                                                                                                                                                               |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                      |
| 31.1                      |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                      |
| 31.2                      |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                      |
| 32.1                      |       | Certifications  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                      | PLC SYSTEMS INC. |
|-------------------------------------------|------------------|
|                                      |             |   |
| Date:   May 14,  2010 | By:              | /s/  James G. Thomasch |
|                                      |             | James  G. Thomasch |
|                                      |             | Chief  Financial Officer(Principal Financial Officer and Principal Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit********Number** | ** ** | **Description of Document**                                                                                                                                                                                               |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                |       |                                                                                                                                                                                                                      |
| 31.1                      |       | Certification  of Principal Executive Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                      |
| 31.2                      |       | Certification  of Principal Financial Officer pursuant to Rule 13a-14(a) or  15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                      |       |                                                                                                                                                                                                                      |
| 32.1                      |       | Certifications  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                      |

 

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